Parents risk pensioner poverty to get children on the property ladder, experts warn
Bank of Mum and Dad lending soars in 2019
Shelling out a staggering £6.3bn in 2019 alone, parents would be one of the 10 biggest mortgage lenders in the UK were they grouped as a financial institution.
This year, despite a slowing property market and only modest increases in the cost of living, research from Legal & General and the Centre for Economics and Business Research has found the average Bank of Mum and Dad cash injection has risen this year by more than £6,000 to £24,100 per contribution.
And while half are doing it with ready cash, thousands of older adults are cashing in lump sums from their pension savings, using pension drawdown or using their annuity income to support the next generation’s home ownership ambitions.
“The generosity of parents and grandparents is inspiring, but many are making big financial decisions without adequate planning or professional advice,” warns Chris Knight, CEO at Legal & General Retail Retirement. “Retirement is much longer, and much more varied, than it used to be. Gone are the days of ‘once and done’ retirement decisions. Informed choices in the run-up to, and at the start of, the retirement journey can make a huge difference when it comes to being able to fund the retirement people really want.”
Nor is achieving the fabled first rung the beginning of the end of the family handouts.
With a quarter of baby-boomer households now citing family spending in general as a major expense and one in five preferring to give any extra cash to their children as a financial gift, a fifth now fear the effects of passing on wealth on their old age finances, according to separate data from insurance firm Aegon.
Steven Cameron, pensions director at Aegon says: “As the youngest of the baby boomers reach the age they can access their pension, many will begin to think about inheritance planning and the desire to pass on wealth to loved ones.
“Transferring wealth is an ambition for many individuals and the introduction of the pension freedoms in 2015 has increased the options for doing so with over-55s now being able to access their defined contribution pension pot flexibly, taking out as much or as little as they like.”
Sure, it’s good that there are now more options for transferring wealth to the next generations. But whether it’s passing on remaining defined contribution pension funds on death or granting financial gifts earlier to help children on to the housing ladder, there are complex considerations including some fiendish tax planning.
“As an industry, it is crucial that we provide the products and solutions people need in later life, as well as encourage them to seek the support of advisers who can help them navigate this increasingly complex landscape,” adds Knight.
But let’s not forget that tax planning isn’t the only fly in the cash-flavoured balm for the average broke millennial.
The warm fuzzy notion of one generation passing on wealth to another like an endless line of pylons disappearing across a hillside into the sunset belies a reality with more problematic imbalances than that.
First, there’s the fact that we are not all passing on equal sums to equally impoverished children. In fact, parents with the capacity to pass on wealth are doing so to those who are already at the wealthier end of their own generation.
And then there’s the touchy subject of expectation and its effect on motivation and financial independence.
“As well as relying on them for more short-term saving goals many under-45s see inheritance as a panacea for their own retirement saving too,” notes Elliott Silk, head of commercial at investment firm Sanlam UK. “But that’s a big gamble. Money being passed down from parents or grandparents is often split-up among other family members or, increasingly, used to pay for care costs meaning the under-45s might not inherit what they expect.”
“People who retire at 65 can easily live for another 20 years – that’s 240 monthly payslips they need to have saved to be able to enjoy the same standard of living. While that might sound like a lot, building a substantial pension pot that delivers peace of mind as well as funds in retirement is entirely doable, but it requires forethought and a detailed plan.
“It’s never too early to start saving for later life, but it’s never too late either.”